Magazine

Wielding A Heavy Weapon Against China

June 20, 2004

The recent housing boom has meant brisk business at Rooms To Go Inc.'s 70 sprawling furniture showrooms dotting six southern U.S. states. A big lure: High-quality, handcrafted furnishings at affordable prices. For $2,500, for example, you can buy the six-piece Island Treasures II solid-oak bedroom set that includes a king-size, four-poster bed in a rich tropical-brown finish with hand-carved pineapple and tobacco-leaf patterns. Such prices are possible because Rooms To Go, based in Seffner, Fla., has the furniture made in China, which boasts efficient production lines and wages as low as 50 cents an hour, compared with $16 in North Carolina. "This kind of furniture couldn't be made here at a price within reach of average Americans," says CEO Jeffrey Seaman.

But after June 17, bedroom sets at Rooms To Go and other U.S. retailers may be less of a bargain. That's when the U.S. Commerce Dept. is expected to make its final ruling on an antidumping suit against seven Chinese manufacturers of wooden bedroom furniture, including the supplier of the Treasures II set. U.S. manufacturers say Chinese rivals, whose annual U.S.-bound exports of bedroom furniture tripled to $1.4 billion from 2000 to 2003, have led to 34,000 U.S. layoffs, dozens of plant closings, and plummeting prices. The Commerce Dept. is unlikely to assess the 440% punitive duties demanded by the U.S. producers, but a hefty levy appears likely since the U.S. International Trade Commission has already ruled that Chinese imports have damaged America's furniture industry.

PHANTOM DISTORTIONS?

China's record so far is abysmal. In every Chinese case over the past four years where the ITC has ruled that a U.S. industry has been damaged -- the first step in a dumping suit -- the U.S. has imposed penalties. Since 2001, the U.S. has issued 22 antidumping findings against a wide variety of Chinese industries -- far more than from any other nation -- alleging they sold goods in the U.S. at less than their true production cost. And the average duties assessed against Chinese producers are more than double those for the rest of the world, ranging as high as 330% on saccharin. What's more, such petitions no longer focus only on minor products such as paintbrushes and candles. U.S. companies increasingly are going after major industries such as furniture and consumer electronics. In May, Washington slapped duties of 5.2% to 78.4% on color TV manufacturers, a sector where Chinese exports to the U.S. had leapt by 150% in three years, to $276 million in 2003.

Why is China such a juicy target? Its $124 billion annual trade surplus with the U.S. is one reason. But just as important is its legal status under international trade law. In most countries, the U.S. investigates dumping cases by looking for government subsidies to industries and determining whether local manufacturers pay fair market prices for raw materials, labor, and facilities. China, though, is classified as a "nonmarket economy." That means the U.S. can simply ignore Chinese data on costs on the assumption they are distorted by subsidized loans, rigged markets, and the controlled yuan. Instead, the government uses data from other developing nations regarded as market economies. In the TV and furniture cases, the U.S. used India -- even though it is not a big exporter of these goods. Since India's production costs were higher, China was ruled guilty of dumping. Under Beijing's deal to enter the World Trade Organization, its nonmarket status will last until 2016.

Now, Beijing is stepping up its lobbying to change the rules. It already has persuaded the European Union, New Zealand, and Singapore to either stop using or more-selectively use third countries as benchmarks in dumping suits. Following a November visit to Washington by Prime Minister Wen Jiabao, the U.S. and China set up a team to explore more equitable ways to resolve dumping disputes and identify reforms needed for China to qualify as a market economy. Meanwhile, Chinese authorities are forming groups to monitor budding trade fights and help manufacturers better understand dumping rules.

But no solution is on the horizon. Washington wants China to implement deep reforms -- including a floating currency and an overhaul of its banking system -- before it will agree to call it a market economy. "We can't rely on Chinese prices because we know they are distorted," says James J. Jochum, Commerce Dept. assistant secretary for import administration. "Until China becomes a market economy, we must use the best tools available to us."

The Chinese see it differently. They argue China is rapidly evolving into a true market economy and that its low costs are the product of massive scale and superheated domestic competition -- not hidden subsidies. "The TV market in China is already totally market-driven. The state doesn't offer us any special policies," protests Tomson Li, chairman of Huizhou-based TV maker TCL Corp., which was hit with a 21% dumping duty. India's TV industry, he says, "is relatively backward, so its costs are higher."

Some complain the field is so tilted it is virtually impossible to win an antidumping suit. Because the U.S. ignores Chinese data, U.S. manufacturers "never need actual proof of market distortion," argues Daniel J. Ikenson of the Cato Institute, a Washington think tank. And the U.S. has enormous discretion in making its cost calculations, so it's tough for Chinese manufacturers to know whether they're obeying U.S. laws, claims William Silverman, who has represented Chinese clients in several suits. "If a Chinese company asks me how to comply, I don't know what to tell them."

Such complaints win little sympathy among besieged U.S. manufacturers. Chinese companies hurt themselves because "they price their goods so far below everyone else in the world that they can devastate American companies in a matter of months," says attorney David A. Hartquist, who represented U.S. industry in the TV case. Declares Doug Bassett, sales vice-president at Vaughan-Bassett Furniture Co., a plaintiff in the furniture suit: "It's our duty to make sure no more jobs are lost because of illegal dumping."

Even if they keep winning skirmishes, the U.S. plaintiffs may be fighting a losing war. If Chinese prices shoot up, furniture production will merely shift to other low-cost nations such as Vietnam, Brazil, and the Philippines, contends Michael J. Veitenheimer, counsel for Fort Worth-based retail chain Bombay Co. (BBA), which imports all of its products. Still, now that U.S. producers have tasted easy victory, "we fear this could be the tip of the iceberg," he says. "Tomorrow, it could be dining-room furniture and then living-room furniture."

The battle lines have been drawn. Unless Washington and Beijing can find a reasonable middle ground for defining a market economy, it will be open season on Chinese manufacturers. And boom times for U.S. trade attorneys.